The Bank of Korea recommended that financial companies gradually reduce their exposure to high-carbon industries worth 411 trillion won (risk exposure: loans, bonds, and stock investment). It is interpreted that in the era of ESG (environmental, social, and governance), if financial companies fail to reduce loans for high-carbon industries, they have sent a warning that corporate value and creditworthiness may be damaged.
According to the’Financial Stability Report for March 2021′ released by the BOK on the 25th, the exposure of 9 high-carbon industries of domestic financial companies (banks, insurance companies, securities companies, management companies, pension funds, etc.) was estimated to be 411 trillion won at the end of last year. . This is the sum of loans for high-carbon industries and investments in bonds and stocks. It increased by 9.6% (36 trillion won) from the end of 2014 (375 trillion won). It is 17.4% of the total exposure of financial companies (2358 trillion won) at the end of last year.
The BOK classified nine industries, including chemicals, coal power plants, and primary metals, as high-carbon industries using direct and indirect carbon emission indicators (TVF). The BOK pointed out that “ESG is spreading while the carbon-neutral policy is accelerating, but financial companies’ related responses are insufficient.”
The BOK said in this report that it is concerned about the rapid rise of household and corporate debt. At the end of last year, the ratio of household and corporate debt to nominal gross domestic product (GDP) was 215.5%, up 18.4 percentage points from the end of 2019. It was the highest after 1975 when statistics were written. Last year’s increase was also the largest on an annual basis.
Koreans “Inadequate to cope with ESG in domestic financial companies”
It is unusual for the Bank of Korea to mention ESG (environmental/social/governmental structure) in its financial stability report in March. The BOK evaluated that domestic financial companies are not able to keep up with the global trend that values ESG.
Norwegian sovereign wealth funds and Goldman Sachs are already deciding whether to invest based on ESG data. Blackrock, the world’s largest asset management company, excluded companies that make more than 25% of their total sales from coal-fired power production and manufacturing from their stock and bond portfolios. The BOK believes that if domestic financial companies do not gradually reduce their exposure (loan and investment) to high-carbon industries, there will be a disruption in financing at home and abroad.
Among the nine high-carbon sectors selected by the BOK, the sector with the largest exposure to financial companies was the chemicals and products sector (102 trillion won). Next, coal power plants (91 trillion won), primary metals such as steel companies (59 trillion won), other transportation equipment (46 trillion won), such as shipping companies, metal processing (42 trillion won), coke and oil refining (35 trillion won), such as oil refineries, and cement. Non-metallic minerals such as companies (21 trillion won), fiber (14 trillion won), and metal mining (1 trillion won) were followed.
The exposure by financial sector was 251 trillion won for banks, 88 trillion won for insurance companies, 54 trillion won for other financial companies such as savings banks, securities firms, and asset management companies, and 18 trillion won for pension funds. Compared to 2014, bank exposure decreased by 21 trillion won. On the other hand, other financial companies, insurance companies and pension funds increased by 58 trillion won. This means that non-banking financial companies are particularly slow to respond to ESG. By product, the exposure was 247 trillion won for loans, 87 trillion won for stocks, and 77 trillion won for bonds.
In this report, the BOK pointed out that the self-employed people’s lives are getting worse and worse due to Corona 19. The number of self-employed households at the end of last year was 192,000 households, which doubled from the end of March last year (83,000 households). At the end of last year, the total debt repayment ratio (DSR) exceeded 40% for these households, and it was found that it was difficult to repay the debt even if all assets were sold.
Financial liabilities held by these households amounted to 7.6 trillion won at the end of last year. The self-employed’s debt-to-income ratio (LTI) also rose 42.8 percentage points from the end of March last year to 238.7% at the end of last year.
At the end of last year, real estate finance, including loans and guarantees related to real estate by financial companies, was estimated to be 2279 trillion won, an increase of 10.3% (212 trillion won) from the end of 2019. Real estate finance exposure to nominal gross domestic product (GDP) is 118.4%.
Reporter Kim Ik-hwan [email protected]